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CIO Insight: You say that in the 21st-century information economy, the role of the customer will change dramatically. How?

Prahalad: The most basic change ahead is a shift in the role of the consumerfrom isolated to connected, from unaware to informed, from passive to active. There is now ubiquitous connectivity thanks to wireless mobility and the Internet. You're getting customers who are networked, engaged activists and global in perspective in all industries. And it's happening at the same time as companies are searching for innovative and creative new ways to use new forms of information technology to engage customers and add value to the bottom line. And all the while, competition intensifies and profit margins shrink.

At the same time, there's more technology in the hands of the corporation. A wide variety of information technologies, such as GPS and wireless data transmission and the Internet, are being used, increasingly, by companies to create value, whether in pharmaceuticals or personal care products or computing and communications. It doesn't matter which industry; industry boundaries and technology boundaries are blurring.

What this means, fundamentally, is that the nature of the relationship between the company and the consumer is changing, because how and where they interface is dramatically changing. Partly, it's because of ubiquitous connectivity, partly because consumers want to engage very differently with companies than suppliers do. It's not happening in all the activities of the company, but it is happening at that point of company-customer interaction.

Increasingly, consumers engage in the processes of both defining and creating value. It's not simply the company telling its customers, "Here's the product, take it or leave it." Now to build customer loyalty, for example, companies are using information technology to let customers inject their view of value into the menu of what companies have to offer rather than accept the company's menu.

Source: The Future of Competition: Co-creating Unique Value with Customers
by C.K. Prahalad and Venkat Ramaswamy

Some companies seem to understand this desire. On a basic level, consider the video rental business, an $8 billion business in the U.S. in 2002. When I visit the local rental store, I may not find my first, second or even third choices. Once I do pick one or two videos, I must watch them within the company-allowed time frame. If I find two hot releases, then I must return them together. If I want to watch both, then I must reorganize my life around the rentals or pay a late fee.

By contrast, Netflix has developed a video rental system designed around consumer-think. As a Netflix customer, I pay a flat monthly fee of $20 to choose from the film's inventory of more than 15,000 DVD titles. At the Netflix Web site, I can explore all available titles by genre, director, actor, top picks of critics and so on, and order films. The first three DVDs arrive in my home mailbox; I can keep the movies as long as I want and when I'm done, I simply seal them in the prepaid envelope provided by Netflix and pop it into the nearest mailbox. It's up to me how quickly I watch the films. The experience is mine, not the company's.

Do these changes apply across industries?

Prahalad: This applies across industry and across companies, and there aren't any exceptions, actually. Let me give you one example. There's a medication called Lotronex. It's the only medication that's available to people with irritable bowel syndrome, yet when people first started taking it, some of them died and many had awful side effects. The Food and Drug Administration pulled the drug from the market in 2000. Normally, that would have been the end of the story for the company, for the FDA and for the patients. But instead, the patients decided to use the Internet and the wireless Web to organize themselves. Today, thanks to the wireless Internet, it's possible to create dynamic customer communities, what we call thematic communitiesand these patients actively lobbied the FDA. They said they knew the drug was dangerous, but said they had no choice: Any alternative was worse.

So the patients got the FDA to reconsider Lotronex. Meanwhile, they appealed to the drug's manufacturer, GlaxoSmithKline, and then went to the community of activist patients and pharmacists, and together, the company, the FDA, doctors and patients came to a new compact on how the drug can be dispensed: Everybody should get further training and understand the risks very clearly. So now this drug is back on the market. The company won because patients co-created with it, and did so with the help of these online thematic communities.

If these patients had not done this, this drug wouldn't have seen the light of day. The patients won, too, because now they have a solution for the problem, which they would not have had otherwise. And this is just one example of co-creation of value that's starting to happen in today's marketplace between consumers and companies.